Mortgages and the CFPB, the New Kid on the Consumer Protection Block

The newest federal consumer protection agency is the Consumer Financial Protection Bureau (CFPB), created in 2011 in response to the financial crisis of 2007-2008. The CFPB has jurisdiction over banks, credit unions, securities firms, payday lenders, mortgage-service companies, foreclosure relief services, and debt collectors, among other financial institutions. Thus far it has focused on mortgages, credit cards, and student loans. It is located inside the Federal Reserve System, with an interim affiliation with the U. S. Treasury Department.

The CFPB has had a contentious history. It began its operations on July 21, 2011, but the original overseer, Elizabeth Warren, encountered strong political opposition and withdrew. An interim director, Richard Cordray, was selected. However, his confirmation was not approved until July 16, 2013, so the agency has only been fully functional for about one month.

Because the financial mandate of the CFPB is so broad, today we will look at just a couple of its recent activities in the mortgage field. Mortgages, and particularly reverse mortgages, have a direct impact on seniors. First we will look at an enforcement action and then at an information program.

Up-sold Mortgages

On July 23, 2013, the CFPB sued Castle & Cooke Mortgage in federal court in Utah, accusing the company and two of its executives of illegally running a quarterly bonus program that gave bonuses to loan officers who persuaded consumers to take out mortgages with higher interest rates. The claim is that the practice violated the Federal Reserve Board’s Loan Originator Compensation Rule which had a mandatory compliance date of April 6, 2011. Officers of the company who did not push higher-interest loans did not receive bonuses. Bonuses were paid to more than 150 Castle & Cooke loan officers. The CFPB estimates that more than 1,100 illegal quarterly bonuses were paid based on the tens of thousands of customers who may have been up-sold since April 2011. Castle & Cooke originated approximately $1.3 billion in loans in 2012 from about 45 branches located in approximately 22 states.

Among the relief sought in the complaint is an end to the unlawful compensation practice, restitution for consumers who may have been upsold, and civil money penalties of up to $5,000 for each violation, up to $25,000 for reckless violations, and up to $1,000,000 for knowing violations.

Reverse Mortgages

If you watch television, you probably have seen well known actors, including a former United States Senator from Tennessee and also the man widely known for his role as the Fonz, extolling the benefits of “reverse mortgages.” A reverse mortgage is a loan that allows homeowners 62 and older to borrow against the equity in their homes. Instead of paying a lender and building up the equity in a home, as you do with a regular mortgage, with a reverse mortgage you receive money from the lender. The balance of the loan increases, along with the interest charged on the loan, while the amount of equity the homeowner has left declines each month.

The proceeds of a reverse mortgage loan can come to the borrower as a line or credit, payable in regular monthly installments, or as a lump sum. The borrower does not have to pay back the loan as long as he or she continues to live in the home, maintains it, and stays current on the home’s expenses, such as homeowner’s insurance and property taxes, but if the borrower moves or dies, the loan becomes due. In many, if not most, cases the house then will have to be sold to repay the loan.

Reverse mortgages are not a scam, and in appropriate circumstances they can be used to allow senior citizens to remain in their homes for the remainder of their lives. Having said that, they certainly are not appropriate for everyone. They should be approached with great caution and only after fully researching and understanding the pluses and minuses. As one example of an issue that needs to be addressed before entering into a reverse mortgage, it is important to consider who will live in the house. If the borrower lives with a spouse or partner, it usually makes sense for them to apply as co-borrowers on the reverse mortgage. That way the co-borrower can continue to live in the home even after the borrower dies or moves out. Anyone living in the home who is not a co-borrower will be required to either repay the loan or move out when the borrower moves or dies.

Most reverse mortgages today are federally insured and are called Home Equity Conversion Mortgages (HECMs). To obtain one of these mortgages, a borrower first must meet with a HECM counselor. If you or someone you know is considering a reverse mortgage, you can find a counselor approved by the U. S. Department of Housing and Urban Development (HUD) by calling 1-800-569-4287 or by visiting HUD’s housing counseling webpage at http://www.hud.gov/offices/hsg/sfh/hcc/hcs.cfm. HUD’s housing counseling agencies provide free or low cost advice, and they are located throughout the country. For example, in Tennessee agencies are listed in all the major cities, as well as in Bartlett, Jackson, Murfreesboro, Paris, and Smyrna, among other locations. Service is provided at some locations in Arabic, Cambodian, English, French, Hindi, Spanish, and other languages.

Are there other types of loans that can serve a purpose similar to a reverse mortgage loan?

I’m not yet behind on my mortgage loan payments, but I worry that I will be. What should I do?

Do I plan to remain in my home for a long time?

Can I wait until I am older?

What are the alternatives to a reverse mortgage?

What are the payout options for a reverse mortgage?

CFPB offers seniors protection both through enforcement and information

CFPB is still in the very early days of its existence, but it is focusing on areas of financial risk that can have great importance for seniors. Like all enforcement agencies, CFPB will have a learning curve, and it may occasionally lose its focus or miss its target. When it is on point, it has powerful tools at its disposal that can be used to help seniors understand their financial choices and to end long standing financial abuses.